Brown & Brown, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; comparable period is the three months ended March 31, 2018. The filing was signed May 9, 2019. Brown & Brown is a diversified insurance intermediary operating through Retail, National Programs, Wholesale Brokerage, and Services segments.
Financial Highlights
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $619.3 million | $501.5 million | 23.5% increase |
| Income before income taxes | $148.5 million | $118.4 million | 25.4% increase |
| Net income | $113.9 million | $90.8 million | 25.4% increase |
| Diluted earnings per share | $0.40 | $0.32 | 25.0% increase |
| Income before-tax margin | 24.0% | 23.6% | 40 basis-point increase |
| EBITDAC | $197.2 million | $156.7 million | 25.8% increase |
| EBITDAC margin | 31.8% | 31.2% | 60 basis-point increase |
| Operating cash flow | $5.4 million | $79.5 million | Decrease |
| Capital expenditures | $23.2 million | $9.8 million | 137.8% increase |
Commissions and fees increased 23.4% to $617.5 million. Core commissions and fees increased 23.2% to $598.5 million, while reported organic revenue growth was 2.0%. Approximately $103.8 million of core commissions and fees growth came from acquisitions, with approximately $9.5 million from net new and renewal business, partially offset by $0.5 million from divestitures.
Segment Performance
- Retail: Revenue increased 39.8% to $389.2 million; organic revenue growth was 3.6%; income before taxes increased 33.3% to $93.8 million; EBITDAC margin increased to 34.2% from 32.2%.
- National Programs: Revenue declined 2.6% to $109.6 million; organic revenue declined 2.3%; income before taxes declined 7.0% to $19.3 million, primarily due to lower flood claims-processing activity and profit-sharing commissions.
- Wholesale Brokerage: Revenue increased 6.6% to $70.5 million; organic revenue growth was 3.3%; income before taxes increased 36.8% to $15.6 million.
- Services: Revenue increased 12.3% to $49.5 million; organic revenue growth was 0.5%; income before taxes increased 4.1% to $9.2 million.
Liquidity, Cash Flow, Debt and Capital
- Cash and cash equivalents were $322.5 million at March 31, 2019, compared with $439.0 million at December 31, 2018. Restricted cash and investments were $302.4 million, resulting in cash and restricted cash of $624.9 million.
- Net cash provided by operating activities was only $5.4 million, primarily reflecting working-capital movements, compared with $79.5 million in the prior-year quarter.
- Total debt was $1.495 billion, net of discounts and debt issuance costs, compared with $1.507 billion at December 31, 2018. The company had no borrowings outstanding under its revolving credit facility at March 31, 2019.
- On March 11, 2019, the company issued $350.0 million of 4.500% senior notes due 2029. Proceeds were used primarily to repay revolving borrowings associated with the Hays acquisition and for general corporate purposes.
- The company stated that existing cash, investments, operating cash generation, and availability under its $800.0 million revolving facility should satisfy normal liquidity needs for at least the next 12 months. Management reported compliance with debt covenants.
- Contractual cash obligations totaled $2.370 billion, including debt, operating leases, interest, tax benefits, and maximum future acquisition contingency payments.
- The quarterly dividend was $0.080 per share, compared with $0.075 in the prior-year quarter.
Material Changes and Unusual Items
- The company completed eight acquisitions during the quarter, with cash paid of $98.3 million and recorded goodwill of $80.4 million. The acquisitions contributed $4.8 million of revenue and $1.0 million of pretax income during the quarter.
- Interest expense increased 57.2% to $15.2 million, primarily because of incremental debt related to the Hays Companies acquisition and higher rates on floating-rate debt.
- Amortization increased 27.5% to $26.2 million because of newly acquired intangible assets.
- The company adopted lease accounting Topic 842 effective January 1, 2019, recognizing operating lease assets of $174.6 million and operating lease liabilities of $198.8 million at March 31, 2019. The adoption materially affected the balance sheet but did not significantly affect reported operating results.
- Estimated acquisition earn-out payables increased to $108.7 million. Maximum future acquisition contingency payments were $218.2 million.
- Q1 2018 included a $2.4 million gain on disposal; Q1 2019 included a $0.5 million loss on disposal, creating a year-over-year comparison effect.
- On May 1, 2019, the board authorized an additional $372.5 million of share repurchases, bringing total remaining authorization to approximately $500.0 million after final settlement of the existing accelerated share repurchase program.
Outlook, Risks and Contingencies
Management stated that, if recent increases in insurable exposure units continue and premium-rate changes remain similar to 2018, it expects positive organic revenue growth for full-year 2019. No quantitative revenue or earnings guidance was provided.
- Revenue is sensitive to insurance premium rates, customer exposure units, policy renewals and cancellations, economic conditions, competition, regulatory changes, and catastrophic weather events.
- The company identified integration and realization risks related to acquisitions, including the November 2018 Hays acquisition, as well as acquisition valuation and financing risks.
- Floating-rate debt exposes the company to higher interest expense; management indicated that a hypothetical immediate 10% change in interest rates would not materially affect the financial statements.
- The company is involved in ordinary-course litigation and regulatory matters. Management did not identify any proceeding expected to have a material adverse effect, but unfavorable developments could affect results, cash flows, and liquidity.
- Wright Flood remains primarily liable to policyholders despite substantial reinsurance. Its statutory capital and surplus was $20.0 million, above the $7.5 million minimum requirement.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether organic revenue growth improves from the reported 2.0% rate and whether the company achieves its conditional full-year expectation.
- The sustainability of acquisition-driven growth and the integration, retention, and earnings contribution of Hays and other acquisitions.
- Operating cash conversion, given $5.4 million of operating cash flow against $23.2 million of capital expenditures in the quarter.
- Debt reduction, floating-rate exposure, interest expense, and compliance with debt covenants.
- The size and timing of acquisition earn-out payments, including $108.7 million recorded payable and $218.2 million of maximum future contingencies.
- National Programs performance, particularly flood claims-processing activity and profit-sharing commissions.
- The impact of planned share repurchases on liquidity, leverage, and per-share results.
- Future litigation, regulatory, reinsurance, and catastrophe-related developments.